SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 39057 / September 11, 1997
Admin. Proc. File No. 3-9174
:
In the Matter of the Application of :
:
MONROE PARKER SECURITIES, INC. :
2500 Westchester Avenue :
Purchase, New York 10577 :
:
For Review of Denial of Access by the :
:
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.:
:
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DENIAL OF ACCESS
Request to Amend Restrictive Agreement
Registered securities association denied member's request to have
restrictive agreement modified to increase the number of firm's
registered representatives from 75 to 175. Association further
denied firm's request to expand the number of issuers of
securities in which the firm was authorized to make markets from
10 to 25. Association articulated a clear basis for denying only
the increase in number of registered representatives. Held,
appeal dismissed in part and remanded in part.
APPEARANCES:
Bill T. Singer, Jenice L. Malecki, Vincent P. Liberti, and David H.
Jarvis, of Singer Zamansky, LLP, for Monroe Parker Securities, Inc.
Alden S. Adkins and Norman Sue, Jr., for NASD Regulation, Inc.
Appeal Filed: October 22, 1996
Briefing Completed: February 28, 1997
I.
Monroe Parker Securities, Inc. ("Monroe Parker" or the "Firm"), a
member of the National Association of Securities Dealers, Inc. ("NASD"),
has applied for review of a decision by the NASD, dated October 8, 1996.
The NASD denied Monroe Parker's request to modify the terms of its
restrictive agreement to permit the Firm to expand the number of its
registered representatives from 75 to 175 and the number of issuers of
securities in which it was authorized to make markets from 10 to 25. Our
findings are based on an independent review of the record.
II.
Monroe Parker has been conducting business as a broker-dealer since
1994. The NASD conditioned its approval of Monroe Parker's membership
application on the Firm's entering into a restrictive agreement limiting to
75 the number of registered representatives engaged in sales and trading
activities and to 10 the number of issuers of securities in which Monroe
Parker could make markets.
In April 1995, a year after joining the NASD, Monroe Parker applied
for permission to increase the scope of its operations. Monroe Parker
sought to increase to 175 the number of registered representatives engaged
in sales and trading and to 25 the number of issuers of securities in which
it could make markets. The NASD Restrictive Agreement
Subcommittee ("RAS") initially denied the application.
Thereafter, NASD staff and Monroe Parker unsuccessfully attempted to
negotiate a resolution of Monroe Parker's requests. During this period,
the RAS also requested additional information from the Firm.
On December 27, 1995, the RAS again denied the request for
modification because it was concerned that Monroe Parker was not adequately
supervising its staff. The RAS identified three areas of concern: 1)
potentially significant sales practice problems evidenced by the number of
canceled initial transactions;
2) insufficient number of qualified Series 24 principals to supervise
employees; and 3) potential conflict of interest in members of the
compliance department also serving as sales supervisors.
Monroe Parker contested the RAS' decision, and hearings were held
before the District Business Conduct Committee ("DBCC") in February 1996.
Monroe Parker's director of compliance, Richard Levitov, testified that
Monroe Parker engaged in telephone solicitations targeted at individuals,
identified by Dun & Bradstreet, who owned companies with revenues in excess
At the time of the application, Monroe Parker employed
approximately 67 registered representatives along with
about 75 "broker trainees," who were unregistered. See
infra note 15. At that time, Monroe Parker was making
markets in the securities of 10 issuers.
Former Part I, Section 3(a) of Schedule C to the NASD
By-Laws, now Rule 1013(a), provides that applications
for modification of restrictive agreements are reviewed
by a subcommittee designated by the District Business
Conduct Committee.
The RAS sought documents related to cancellations of
transactions, Regulation T extensions, and customer
complaints.
======END OF PAGE 2======
of one million dollars per year. Generally, Monroe Parker solicited
initial transactions in well-known stocks that were either listed on the
New York Stock Exchange or quoted on the Nasdaq National Market System.
The NASD staff asserted that the Firm's supervision of its registered
representatives was not adequate. In support of this position, the staff
cited the Firm's high rate of cancellations of initial transactions in new
accounts ("reneges") and the Firm's failure to investigate or
correct its sales practices. The evidence indicates that, between August
1994, when the Firm began conducting business, and December 1995, 37.7
percent of initial transactions resulted in reneges. Of a total of 3,606
initial customer transactions executed during this period, 1,362 resulted
in reneges. Reneges accounted for 61.82 percent of the Firm's total
canceled transactions.
Under the Firm's policy, any loss resulting from a renege was divided
equally between the registered representative and the Firm. On the other
hand, if a sellout occurred in a pre-existing account, the registered
representative assumed all of the loss. Levitov stated that the Firm was
willing to share in the losses from reneges because it did "not want to
discourage brokers shying away[,] . . . being concerned with opening new
accounts, because of being afraid of taking 100% of a loss, if it would be
split that way . . . ."
Levitov testified that he found the Firm's renege rate acceptable and
believed that it was merely "a cost of doing business." Levitov had
previously worked at Drexel Burnham Lambert, and he claimed that one Drexel
branch office had engaged in telephone solicitations and experienced a six
percent renege rate. He also noted that an NASD newsletter had stated that
a five percent renege rate was appropriate for inter-dealer transactions in
municipal securities. In his testimony, Levitov, however, grossly
underestimated the rate of reneges in Monroe Parker's new customers'
accounts. He testified that reneges were about 8 percent, rather than the
accurate figure of about 38 percent.
Levitov also testified that he made no independent effort to determine
the cause of any cancellations because he did not find them troublesome.
He would investigate a particular renege only if a customer complained
about an unauthorized trade. His investigation of such a customer
complaint, moreover, consisted merely of asking the registered
representative to explain the trade. Levitov would accept the explanation
without further inquiry.
Monroe Parker identified any initial transaction in a
new account which was not paid for by settlement date
as a "renege." Monroe Parker described other
transactions which were canceled and sold for non-
payment as "sellouts." The NASD accepted these
definitions for purposes of its opinion, and, for
continuity, we will use them as well.
======END OF PAGE 3======
The DBCC denied Monroe Parker's request on March 27, 1996. The DBCC
found that the Firm's rate of reneges was a "red flag" stating: "On the
basis of our collective experience in the securities business, we believe
that for a firm of virtually any size to experience the number of reneges
that Monroe Parker does is an indication that something is defective in its
sales practices." The DBCC concluded that Monroe Parker had not
demonstrated that the requested modifications were
justified. The DBCC denied Monroe Parker's request to expand
the number of markets it makes because the DBCC claimed that neither the
Firm nor NASD staff had presented any information directly bearing on the
appropriateness of the requested modification.
On appeal, the National Business Conduct Committee ("NBCC") noted that
"the renege rate, while somewhat improved since the DBCC decision in this
matter, is nonetheless still clearly indicative of persistent operational
and supervisory
problems." The NBCC also noted that it was not favorably
impressed with the Firm's compliance procedures based on notes drafted by
NASD staff following an examination of the Firm and based on a Letter of
Caution issued to the Firm on March 13, 1996. The NBCC found
that Monroe Parker had not made a sufficient showing to justify the
requested expansion of the number of registered representatives and the
number of
Under the rules in effect at the time of the
application, Part I, Section (3)(a) of Schedule C to
the NASD By-Laws, required the applicant to demonstrate
that modifications were appropriate. The NASD has
recently revised and renumbered its Rules of Practice,
and this provision is now Rule 1013.
Monroe Parker, in fact, had submitted resumes of its
traders as well as records indicating that the traders
had clean disciplinary records. The Firm had also
submitted correspondence from NASD staff indicating the
staff's willingness to allow the Firm to raise the
number of markets it made under certain conditions.
Information submitted before the NBCC indicated that,
in January 1996, the monthly renege rate was 37.08
percent; in February 1996, it was 32.66 percent; and in
March 1996, 26.99 percent.
The staff's exit interview notes and Letter of Caution
indicate that the Firm, among other things, failed to
calculate and maintain accurate net capital, failed
correctly to maintain and file its sales literature and
advertisements, and failed to have adequate supervisory
procedures.
======END OF PAGE 4======
markets. This appeal followed.
III.
We review the NASD's denial of Monroe Parker's application for
modification of its restrictive agreement under Section 19(f) of the
Securities Exchange Act of 1934 ("Exchange Act"), which requires us to find
that the specific grounds on which such denial is based exist in fact, that
the denial "is in accordance with [NASD rules], and that such rules . . .
were applied in a manner consistent with the purposes of" the Exchange Act.
Monroe Parker does not contest the NASD's computation of its renege
rate. It claims that the public is not harmed by its practices because the
Firm does not require new clients to deposit initial funds.
We note initially that the Firm's explanations to us of its renege
rate are not supported by the record. Levitov suggested that the renege
rate could be caused by "buyer's remorse." However, more than a third of
the reneges involved profitable positions, indicating that many customers
were cancelling transactions despite potential earnings. Moreover, the
Firm's solicitations were directed to what it asserts were sophisticated
customers. The NASD noted that such customers would less likely be
susceptible to buyers' remorse. We agree.
Levitov also suggested that the implementation of "T+3 settlement" in
June 1995 might be a factor in the level of reneges. If the
change in settling customer accounts was responsible for the high rate of
reneges, however, the rate would have gone up in the months immediately
following implementation of the new policy. It did not. Indeed, the rate
was relatively stable both before and after the implementation of T+3
settlement.
Levitov contended that initial transactions were canceled at a high
rate because neither the Firm nor its clearing agent, J.B. Oxford, were
well known. Indeed, the Firm asserts that the renege rate is justified
because it is a small broker-dealer. The Firm claims that it cannot afford
large advertising campaigns and that "[c]old calling is the only
economically viable option for a small, entrepreneurial firm." The Firm,
The NBCC found that the Firm's application was
deficient with respect to the showing required by three
provisions of Schedule C to the NASD By-Laws: Section
1(c)(3) (the Firm's proposed internal procedures,
including compliance procedures); Section 1(c)(5)(D)
(supervisory personnel, methods and procedures); and
Section 1(c)(6) (other factors relevant to the scope
and operation of [the firm's] business).
T+3 settlement means that customers must pay for
transactions within three days of the trade, or the
transaction is canceled. The Firm does not allow
extensions on initial transactions.
======END OF PAGE 5======
moreover, encouraged registered representatives to engage in aggressive
sales tactics by sharing any losses caused by cancellations in new
accounts.
The Firm further complains that the NASD merely relied on the NBCC's
"collective judgment" that the Firm's rate of reneges was too high. We
agree, however, that the Firm's renege rate, by any objective standard, was
a "red flag" that should have indicated an urgent need for investigation of
the Firm's sales practices. We have frequently found that excessive
reneges or cancellations are indicative of underlying compliance problems
and may be evidence of violations. Our concern is heightened
by the Firm's casual response to the excessive cancellations. Its failure
to investigate or institute remedial measures demonstrates a lack of
adequate supervision and displays deficiencies in Monroe Parker's
compliance procedures. As noted above, Levitov testified that
he believed that the percentage of reneges was a fraction of the actual
rate. At the same time, Levitov stated that "there is like a built in two
to four reneges a day. . . . It is something that I've seen as a
continuous pattern." Levitov, moreover, did nothing to investigate reneges
unless he received a customer complaint.
The Firm asserts that, in denying its application, the NASD has
somehow established a "renege rule" that is illegal and unenforceable
because this alleged rule was not approved by the NASD's membership or by
this Commission, as required. The NASD's decision did not purport to set
an appropriate level of reneges. Rather, it observed that the reneges were
numerous and persistent. Monroe Parker did not give an adequate
explanation for the rate and did not investigate to determine whether the
registered representatives were engaging in violations. These
See Reynold F. Vaughan, III, 51 S.E.C. 1078 (1994)
(canceled orders indicated unauthorized trading); Frank
J. Custable, Jr., 51 S.E.C. 855 (1993) (same); Wedbush
Securities, Inc., 48 S.E.C. 963 (1988) (same). Indeed,
in one of the cases Monroe Parker cites in its brief,
Shearson Lehman Brothers, Inc., 1991 WL 424425 (NYSE)
(May 14, 1991), the firm's failure properly to cancel
transactions as requested by customers was evidence of
violations of Regulation T.
The staff's exit interview notes and Letter of Caution
also indicate problems in the Firm's supervision and
procedures.
Monroe Parker argues that, because the Firm and the
registered representatives share any losses, customers
are not harmed. However, merely because there is no
monetary harm to a customer does not mean that an
unauthorized trade is not a violation. If the reneges
in fact result, even in part, from unauthorized trades,
it is also possible that unauthorized trades could be
(continued...)
======END OF PAGE 6======
matters, together with the Letter of Caution and exit interview notes
introduced before the NBCC, were properly considered by the
NASD in assessing the Firm's procedures. Thus, we find that, on the record
before us, the NASD's refusal to allow Monroe Parker to add additional
registered representatives appears consistent with the purposes of the
Exchange Act.
Monroe Parker argues that its supervisory and compliance procedures
are adequate and appropriate and that the NASD had no basis for denying its
application. Specifically, Monroe Parker argues that it has complied with
all regulations, that it has demonstrated good faith by "throwing its files
wide open," and that it has revised its procedures and compliance manual in
accordance with the NASD's requests. Monroe Parker, however, is required
to comply with all NASD rules and requests, independent of any request to
modify its restrictive agreement.
Monroe Parker contends that there is no basis for continuing the
restriction on the number of markets it makes. The Firm notes
that it presented evidence of the appropriateness of the application for
increased markets, including: resumes of its traders, demonstrating their
(...continued)
occurring that are subsequently ratified by the
customers. The fact that a customer ultimately accepts
a trade does not mean that the transaction was properly
authorized. Frank J. Custable, Jr., 51 S.E.C. 643, 650
(1993).
See supra note 8 and accompanying text.
We note that, during the NASD staff's investigation of
the Firm, the Firm employed 75 unregistered broker
"trainees," who were paid by the registered personnel
whom they assisted and who engaged in cold-calling to
identify prospective clients. A staff member testified
that, when he interviewed certain of Monroe Parker's
registered representatives, four of the representatives
stated that these trainees were "qualifying"
prospective clients, i.e. asking for information about
potential customers' financial status and investment
experience or objectives. This does not appear to be
consistent with NASD rules.
Moreover, the revisions to the compliance procedures do
not appear to be related to Monroe Parker's methods of
soliciting business.
The Firm points out that, during negotiations with NASD
staff and in an initial RAS determination, the Firm was
to be allowed to make markets in 40 issuers of
securities, subject to an increase in the Firm's net
capital.
======END OF PAGE 7======
years of experience; records showing that the traders have clean
disciplinary histories; and correspondence demonstrating that the NASD had
agreed to allow the Firm to make additional markets.
It is not clear how the Firm's identified supervisory and compliance
problems impact on its request to increase the number of issuers of
securities in which it makes markets. Because the connection between these
inadequacies in compliance and supervision and an increase in the number of
issuers of securities in which the Firm may make markets is not clear, we
remand this part of the NASD's decision for a more detailed explanation.
IV.
The Firm claims that it was denied due process in the NASD
proceedings. Specifically, Monroe Parker complains that it was not given
the opportunity to appear or provide evidence at the RAS hearing. The NASD
By-Laws do not provide for oral hearings before the RAS. Moreover, the
Firm requested and received a full hearing before the DBCC as provided by
the By-Laws.
The Firm also contends that the RAS denied it a meaningful
hearing because the RAS "tabled" the proceedings and took one and one-half
years to reach a decision. The proceedings before the RAS were delayed, at
least in part, by the Firm's request that they be adjourned to allow
negotiations with NASD staff to take place.
The Firm also claims that the various panels did not fairly consider
the evidence. Monroe Parker complains that it was prejudiced because there
were several volumes of documents present during the DBCC hearing to which
NASD staff referred. The Firm claims that it did not have a chance to
review these documents. Although we do not condone these procedures, there
has been no prejudice to the Firm. NASD counsel represented that these
documents constituted the bases for charts, which were admitted into
evidence, that represented the Firm's renege rate. Monroe Parker did not
challenge the staff's calculation of the Firm's rate of reneges. Moreover,
the Firm's counsel, in fact, had an opportunity to review these documents
It is not clear whether the NASD considered this
evidence in its determination.
See First Potomac Investment Services, Inc., 50 S.E.C.
848 (1992) (remanding denial of proposed modification
and ordering NASD specifically to address firm's
justifications).
We note that the RAS issued its final decision eight
months after the Firm's application.
======END OF PAGE 8======
during a continuance in the proceedings, but there is nothing in the record
to suggest that he did so.
The Firm also contends that the panels relied on hearsay evidence of
the NASD staff and the panels' "collective experience." NASD
proceedings are not governed by the Federal Rules of Evidence, and "hearing
panels have great latitude in permitting evidence and testimony from
witnesses that might be excluded on relevance and hearsay grounds before
other tribunals." The mere fact that the panel members were
not associated with firms of the same type as the applicant does not mean
that they were unqualified to evaluate the conduct
here. Moreover, the initial decision was voted on by the
entire DBCC and sustained by the NBCC. In any event, we note that any
prejudice would be cured by the de novo review accorded by this
Commission. For the reasons stated above, the appeal is
dismissed with regard to Monroe Parker's request to expand the number of
registered representatives that the Firm can employ. It is
remanded with regard to the Firm's request to expand the number of markets
Similarly, although the Firm contends that it was
prejudiced because it did not receive a list of
rebuttal witnesses, it did not seek to have additional
witnesses testify or request that NASD witnesses be
recalled. The NASD has recently proposed new rules
that, if adopted, will clarify when document and
witness list exchanges should take place. SR-NASD-97-
28 at 9241(c), Securities Exchange Act Rel. No. 38531,
(April 21, 1997).
The Firm also complains that an NASD staff member made
comments to the Firm's counsel during unrelated
proceedings, indicating a purported bias by the staff
member against Monroe Parker. This staff member was
not assigned to and had no responsibility over this
matter. Moreover, "the staff does not decide cases . .
. allegations of staff bias . . . do not suggest that
the fairness of the hearing itself was compromised."
Frank J. Custable, 51 S.E.C. at 650 (citation omitted).
Rita H. Malm, Securities Exchange Act Rel. No. 35000
(Nov. 23, 1994), 58 SEC Docket 121.
Id. Nor is Monroe Parker entitled to a hearing panel
made up of any specific type of broker-dealer. Stephen
Russell Boadt, 51 S.E.C. 683, 685 (1993).
See Conrad C. Lysiak, 51 S.E.C. 841, 847 (1993);
Gilbert A. Zwetsch, 50 S.E.C. 816, 820 (1991).
As noted by the NASD, the Firm may seek to renew its
application at some later date in light of additional
favorable information.
======END OF PAGE 9======
it makes. We do not intend to suggest any view as to the outcome on
remand.
An appropriate order will issue.
By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON,
and HUNT).
Jonathan G. Katz
Secretary
All of the contentions advanced by the parties have
been considered. They are rejected or sustained to the
extent that they are inconsistent or in accord with the
views expressed herein.
======END OF PAGE 10======
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No.
Admin. Proc. File No. 3-9174
:
In the Matter of the Application of :
:
MONROE PARKER SECURITIES, INC. :
2500 Westchester Avenue :
Purchase, New York 10577 :
:
For Review of Denial of Access by the :
: NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.:
:
ORDER DISMISSING APPEAL OF DENIAL OF ACCESS IN PART AND REMANDING IN PART
On the basis of the Commission's opinion issued this day, it is
ORDERED that the appeal of MONROE PARKER SECURITIES, INC. of the
denial of modification of its restrictive agreement to raise the number of
registered representatives that may associate with the firm, be, and it
hereby is, dismissed;
ORDERED that the action of the National Association of Securities
Dealers, Inc. in restricting the number of securities in which MONROE
PARKER SECURITIES, INC. can make a market, be, and it hereby is, remanded.
By the Commission.
Jonathan G. Katz
Secretary